What Is Sequestration in Medical Billing?

Sequestration in medical billing refers to an automatic reduction in federal spending that directly impacts healthcare providers. This measure, while broad in its application across various federal programs, holds specific implications for the healthcare sector. This article explains what sequestration means in medical billing, detailing its origin, effects on provider payments, and what patients should know.

Understanding Sequestration in Healthcare

Sequestration is a mandatory, across-the-board reduction in federal spending, enacted to achieve specific deficit reduction targets. In healthcare, this measure primarily affects payments made through federal programs like Medicare. Its implementation stems from the Budget Control Act of 2011, which aimed to reduce the national deficit. When those goals were not met, automatic spending cuts were triggered.

The American Taxpayer Relief Act of 2012 postponed the initial implementation of these cuts for Medicare, but they officially began on April 1, 2013. For Medicare payments, sequestration mandates a 2% reduction. This percentage is applied uniformly across most Medicare Fee-for-Service (FFS) claims, unless explicitly exempted by law. This 2% reduction for Medicare benefit payments is currently extended through fiscal year 2032.

How Sequestration Affects Medical Payments

The 2% sequestration reduction directly impacts the reimbursement healthcare providers receive for services rendered to Medicare beneficiaries. This reduction is applied to the Medicare-approved amount for a service before other adjustments, such as patient deductibles or coinsurance, are calculated. For example, if Medicare approves a service for $100, the 2% sequestration reduces Medicare’s payment by $2, meaning the provider will receive $98 from Medicare, assuming no patient responsibility.

Providers observe this reduction on their remittance advice (RA) or electronic remittance advice (ERA) documents. The sequestration adjustment is identified using Claim Adjustment Reason Code (CARC) 253, which specifies “Sequestration – reduction in federal payment.” This code often appears alongside a Group Code of CO, indicating a contractual obligation reduction that the provider must absorb. This consistent trimming across all Medicare payments can accumulate significantly over time, affecting a provider’s overall revenue stream.

Specific categories are exempt from this 2% reduction. These exemptions include certain low-income subsidies under Medicare Part D, catastrophic subsidies, and Qualified Individual premiums. Social Security, Medicaid, and veterans’ benefits are also not subject to these cuts. While Medicare Advantage plans are not directly subject to the 2% cut on individual claims, their payment rates can be indirectly influenced by broader federal budget decisions.

What Patients Need to Know

For Medicare beneficiaries, sequestration does not directly increase their out-of-pocket costs. Patients’ responsibilities, such as deductibles, co-payments, and coinsurance, are calculated based on the full Medicare-approved amount before the 2% sequestration reduction is applied. The sequestered amount is absorbed by the healthcare provider and cannot be billed to the patient.

When reviewing an Explanation of Benefits (EOB) from their Medicare plan, patients might see an indication of the sequestration adjustment. This information would reflect the reduction in the amount Medicare paid to the provider, but it will not show up as an amount the patient owes. For instance, if a service had a Medicare-approved amount of $100 and a 20% coinsurance, the patient would still be responsible for $20. Medicare would then pay the provider $78.40 ($80 minus the 2% sequestration), but the patient’s liability remains unchanged. Patients should review their EOBs to understand how their benefits were applied. The sequestration reduction is a matter between Medicare and the provider and does not create a new financial obligation for the patient.